Limited Liability Partnerships

Lilly Evie, Ashley Dugger
  • Author
    Lilly Evie
  • Instructor
    Ashley Dugger

    Ashley has a JD degree and is an attorney. She has extensive experience as a prosecutor and legal writer, and she has taught and written various law courses.

Understand the definition of Limited Liability Partnership (LLP). Know what an LLP is and learn the advantages of an LLP by understanding LLP examples. Updated: 03/31/2022

What is LLP?

A Limited Liability Partnership (LLP) refers to a business type that protects the owners from financial liability. An LLP is considered an entity of its own, and owners' liability to the company is limited to the amount they invest. The significance of an LLP is to have partners spread the risk of business and leverage their various skills and expertise. An LLP also gives the benefits of a Limited Liability Company with the flexibility of a partnership.

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  • 0:07 Limited Liability Partnership
  • 2:42 Advantages
  • 4:34 Disadvantages
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How Does a Limited Liability Partnership Work?

A limited liability partnership is different from a general partnership because a partner is not liable for the negligence or nuance of the other partners in the LLP. It also takes the features of both partnerships and corporations. For example, a partnership alone will not offer each partner limited liability in case of debt or lawsuits. However, an LLP offers all partners protection from such instances, just like corporations.

Limited Liability Partnership vs. LLC

  • The most notable difference between an LLP vs. LLC is its basic definition. In a limited liability partnership, owners are known as partners, while in an LLC, the owners are known as members.
  • For limited liability protection, partners in an LLP are protected from liability against the debt and negligence of their fellow partners, whereas an LLC protects members from business debts and any legal actions against the business as an entity.
  • Members of an LLC can either hire a management team or get members into the management. However, partners in an LLP have to manage the partnership themselves, based on the agreement they have in the partnership agreement.
  • There are a lot of tax options for an LLC. It can either get taxed as a corporation or as an S corporation. The S corporation option means that all corporate incomes and losses and other deductions are passed to the shareholders for tax purposes. An LLP is only taxed as a partnership.

Limited Partnership vs. Limited Liability Partnership

Limited partnership and Limited liability partnership are often mistaken. While an LLP will limit partners' liability, limited partnerships will limit liability for some partners. This exception in a limited partnership means that one partner must be listed as the general partner and thus has unlimited liability. The other partner then needs to have limited liability. In addition, limited partners do not have significant amounts invested in the business, hence cannot also participate in most decisions.

How To Form A Limited Liability Partnership?

Limited liability partnerships are formed and registered in the state where the business is located. These partnerships need to formally register as LLPs and formally declare it in their forms. Many states only allow professionals to form LLPs, although a few others limit this chance to some chosen professions such as doctors and lawyers.

The following are primary steps required by all states to form a limited liability partnership;

  • Verify your qualification status since some states only allow a few chosen professions to form limited liability partnerships.
  • Pick and register the "Doing Business As" (DBA) name. This name needs to be different from other registered businesses in your state.
  • Draft a limited liability partnership agreement that defines the roles and responsibilities of each partner. This document also indicates the capital contribution of each partner and how profits and losses will be distributed.
  • The partnership then needs to designate a registered agent with a physical address to conduct business in the state.
  • Apply and file for a certificate of limited liability partnership.
  • Register for an Employer Identification Number (EIN), a requirement by the IRS for tax purposes. In addition to the EIN, businesses may also need to apply for a state ID number in some states.
  • Acquire the necessary federal, state, and local licenses and permits.
  • Some states also require limited liability partnerships to purchase insurance coverage before starting operations.
  • Lastly, states like New York require limited liability partnerships to publish a detailed notice of formation in two newspapers that serve the county where the business is located.

Limited Liability Partnership Examples

There are two common limited liability partnership examples: professional organizations and licenses and limited vs. full shield.

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Frequently Asked Questions

What is an LLP and how does it work?

An LLP is a type of partnership that limits partners' liabilities than other types of partnerships, such as general. An LLP works by exempting other partners from liability over the negligence of any individual partner in the business.

What are the benefits of a limited liability partnership?

The main benefit of an LLP is the creation of a balance between managing control and reducing partners' liability. This flexibility allows for partners to decide how much they need to be involved in the business.

What is the difference between a LLP and LLC?

The owners of an LLP are known as partners, while the founders of an LLC are called members. Additionally, the management in LLPs is done by the partners themselves, but LLCs are free to hire managers to run the business.

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